Motley Fool 2/3/2013

Q: I heard that American Airlines’ parent, AMR, reported a profit. Should I invest in it? — C.M., Ashland, Ky.

A: Airlines are a notoriously difficult industry, featuring challenges such as fare wars, volatile fuel prices, labor issues, weather complications, costly empty seats and more. Southwest Airlines has been a rare success — but its history is turbulent, too. AMR, meanwhile, is currently in bankruptcy protection.

Super-investor Warren Buffett has said that “ ... if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

A: Mutual fund managers invest in assets (such as stocks or bonds) according to stated sets of objectives. Shares are issued and redeemed on demand at a specific net asset value determined at the end of each trading day (based on the total market value of the fund’s holdings). The number of shares is not fixed. If many people want to buy in, the fund company will issue more shares.

Meanwhile, a unit investment trust (UIT) invests in a relatively fixed portfolio of investments. These are held until the trust is liquidated at a predetermined date in the future. Investors who want to trade shares of a UIT before it matures can often do so in the secondary market.

Unlike a mutual fund, UIT share prices in the secondary market may be priced above or below the net asset value of the trust’s actual holdings. When you buy shares of UITs, you typically pay a sales fee, or load, of around 4 or 5 percent; many mutual funds carry no sales load at all.

Fool’s School

Day-Trading Dangers

Day-trading may seem like a good way to make money, but it’s really gambling, not investing — and very often just as effective as buying an armload of Powerball tickets.

Successful long-term investors study businesses, carefully select stocks and aim to hold on for years. They consider themselves, rightly, as part-owners of real businesses. Day-traders, meanwhile, tend to spend hours glued to monitors, watching stock-price graphs and placing orders. They’ll typically place scores of orders each day and hold each stock for a few minutes or hours. Many ignore company fundamentals and may not even know what various companies do.

While investors pay long-term capital gains rates on stocks held for more than a year, day-traders are stuck paying generally higher short-term rates.

A study by the North American Securities Administrators Association suggested that only about 12 percent of day-traders might trade profitably, and that some 70 percent “will almost certainly lose everything they invest.” (Note that trading “profitably” does not necessarily mean beating the performance of the S&P 500, available via inexpensive index funds.)

According to managers of day-trading firms cited in a Washington Post Magazine article, about 90 percent of day-traders “are washed up within three months.” A principal of a day-trading firm even admitted, “95 percent will fail in the first two years.” Former Securities and Exchange Commission (SEC) Chairman Arthur Levitt recommended that people day-trade only with “money they can afford to lose.” The SEC has called it “highly risky,” and warns of possible “devastating losses.”

Those who’ve made the biggest killings in day-trading may be the ones who run day-trading firms, providing day-traders with trading equipment and charging commissions per trade.

People who trade stocks online, though, are not necessarily day-traders. Accessing brokerages online makes sense for most people, especially when commissions can be $5 or less per trade. (Learn more at broker.fool.com.)

Resist any temptation to buy and sell stocks rapidly in large numbers. Don’t let yourself or those you care about get sucked into day-trading. Learn more at sec.gov/answers/daytrading.htm.

My Dumbest Investment

Studebaked

When I was a 1952 engineering grad, I was dealing with an Omaha developer. I just had to have a newly restyled 1953 Studebaker car then, and he thought the new model would turn the ailing company around. (He figured, “How much below $7 could the stock drop?”) I bought the car and he bought the stock. Over the next few years, I watched his $7,000 investment shrink as he watched me try to get my lemon auto fixed. I had a loser auto, he had a loser stock. — J.P.G., Santa Rosa, Calif.

The Fool responds: Companies with good products can still struggle and sometimes lose. And those with bad products can hang on for a while. Ideally, seek companies with great products, strong competitive positions and positive growth trends. Never think a stock can’t go lower — the company can always go out of business or file for bankruptcy protection, wiping out shareholders.

In the early 1950s, Studebaker was struggling with high costs, quality problems and price wars between Ford and General Motors. It ended up merging with Packard, but struggles continued.

Foolish Trivia

Name That Company

I trace my history back to 1845 in Cincinnati, when a Swiss immigrant carriage-maker made a billiard table. I later moved into the world of bowling, and introduced a rubber bowling ball in 1906 and an automatic pinsetter in 1956. Today I’m a leader in boats, fitness, bowling and billiards, and offer everything from game-room furniture to cardio equipment to boat-piloting joysticks. In 1946, I commissioned a fortunetelling device in the form of an eight-ball — the Magic 8 Ball rights are now owned by Mattel. In 1972, one of my engineers invented the Air Hockey game. Who am I?

Last Week’s Trivia Answer

My roots go as far back as 1783, when Jean Jacob Schweppe created carbonated mineral water. In addition to the two big brands that make up my name, I’ve also got these under my roof: Sunkist Soda, 7UP, A&W, Canada Dry, Crush, Mott’s, Squirt, Hawaiian Punch, Clamato, Schweppes, Venom Energy and Mr. & Mrs. T mixers. One of my two flagship brands is the oldest soft drink in the United States. I’ve taken many forms through acquisitions and divestments. My current form was spun off from Cadbury in 2008. I rake in about $6 billion a year. Who am I? (Answer: Dr Pepper Snapple Group)

The Motley Fool Take

Qualcomm Is Bigger Than Apple’s Cutbacks

If you want to profit from the growth of smartphones and related technologies, take a look at Qualcomm (Nasdaq: QCOM). Its technology is found in iPhones and many other devices, and while some worry about a possible slowdown in iPhone sales, there’s much more to Qualcomm, including plenty of sales to other device-makers.

For starters, it’s in strong financial shape, with 2012 revenue surging by 28 percent over year-earlier levels to $19 billion and net income growing by 43 percent. A leader in smartphone processors, Qualcomm has more than $26 billion in cash and investments. Considering how much it put into research and development in 2012 (about $3.9 billion), that’s a pretty good stockpile.

The company also just launched its most powerful version of Snapdragon processors, which will be in smartphones and tablets later this year. So between current mobile processors and future mobile processors, Qualcomm has much more going on in the mobile industry than just iPhone components.

Qualcomm has one more thing that investors need to consider: its valuable patents. With thousands of CDMA (Code Division Multiple Access) patents, Qualcomm earns 3 percent to 5 percent off of every CDMA-enabled mobile device sold. Last year, its licensing revenue grew by 16 percent. (The Motley Fool owns shares of Qualcomm.)